Mortgage Foreclosure & Refinance Resource

Neither one of the choices should be taken lightly, and of course you need to talk to your attorney, but here are some facts if you’re thinking about filing for bankruptcy to avoid foreclosure.  First, we caution against falling for some of the schemes that have been developed that entice a homeowner who is facing foreclosure to transfer a portion of the title to his home to a third person, who then files for bankruptcy. While that may temporarily delay the foreclosure courts are getting wise to the scheme and the delay may be very temporary. Typically the homeowner pays large fees and loses his or her home anyway. Some of the people engaging in such schemes have also been charged with fraud.  But now, with that warning out of the way…

When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order (called the Order for Relief) that includes a wonderful thing known as the “automatic stay.” The automatic stay directs your creditors to cease their collection activities immediately, no excuses. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending—typically for three to four months. However, there are two exceptions to this general rule:

Motion to lift the stay. If the lender obtains the bankruptcy court’s permission to proceed with the sale (by filing a “motion to lift the stay”), you may not get the full three to four months. But even then, the bankruptcy will typically postpone the sale by at least two months, or even more if the lender is slow in pursuing the motion to lift the automatic stay.

Foreclosure notice already filed. Unfortunately, bankruptcy’s automatic stay won’t stop the clock on the advance notice that most states require before a foreclosure sale can be held (or a motion to lift the stay can be filed). For example, before selling a home in California , a lender has to give the owner at least three months’ notice. If you receive a three-month notice of default, and then file for bankruptcy after two months have passed, the three-month period would elapse after you’d been in bankruptcy for only one month. At that time the lender could file a motion to lift the stay and ask the court for permission to schedule the foreclosure sale.

If bankruptcy seems to be an option, consider a Chapter 13 or “wage earner” repayment bankruptcy as an alternative to a Chapter 7 straight bankruptcy. Under a Chapter 13 plan, it is possible to make up the missed payments out of your income through the repayment plan. Under a Chapter 13 filing, you pay back your debts under a plan worked out by the court. The trustee collects payments, pays off your debts and makes sure you stick to the plan.  Under a Chapter 7 filling, you get to keep certain property (this is where state laws vary), but the rest is turned over to a court-appointed trustee who sells your stuff or gives it to lenders to satisfy your debts.